Imagine Web3 Goes Mainstream: What Could Possibly Go Wrong?"
In solving the problems that hold web3 back today, we risk creating new problems that could be even bigger.
Last month I outlined why web3 will inevitably go mainstream. But that’s not necessarily a good thing. In this follow-up, I argue that the factors which will propel web3 to the mainstream could overshoot and create problems in the future.
That’s because there are two types of problems in the world: when something doesn’t work correctly, and when it does.
1. Class 1 problems: This doesn’t work, and causes X problem.
2. Class 2 problems: This works perfectly, and causes Y problem.
This distinction comes from Kevin Kelly, who uses cars as an example. A Class 1 problem, back in the 1920s, would have been something like ‘it only comes in one colour’. We’ve fixed all those problems, and now almost everyone drives. Cars work as intended nowadays: there are no class 1 problems, but the fact that everyone now drives has caused other issues, like environmental pollution, which is a Class 2 problem.
Today, electric cars are in their Class 1 stage. They don’t have enough range and are hard to recharge. But entrepreneurs will soon solve these problems and electric vehicles will be everywhere. This creates Class 2 problems, like strain on the electricity grid. If everyone shifted to electric vehicles, electricity demand would grow by 10% and vary in ways that power providers aren’t used to predicting.
Currently, web3 (blockchains and the ecosystem around them) is in the Class 1 stage. It’s too easy to be hacked, wallets are too complicated, self-custody is too difficult, gas fees are too costly.
But we don’t need to worry about Class 1 problems…
We don’t need to worry about Class 1 problems because web3 is such an attractive technology that entrepreneurs are rushing to solve them (as I argued last month). In doing so, they will unlock some of the value that web3 has to offer, web3 will become better for users, people will start using blockchains, NFTs, and crypto wallets, and entrepreneurs will end up with a successful company.
But even brilliant entrepreneurs cannot make brilliant products from bad tech. This is why I wanted to write a piece exploring exactly why web3 will go mainstream, and thus one worth working in. You don’t need to worry about the Class 1 problems if you believe that web3 has legs.
The stats bear this out. Developer activity in web3 has increased by 69% every year since 2009. Web3 startups have risen in number by 63% yearly over the same period.
Class 2 problems come from the same reasons that mitigate the Class 1 problems.
In solving the Class 1 problems that hold web3 back today, we risk creating new Class 2 problems that could be even bigger.
What could they be?
Kelly suggests that Class 2 problems are those the market doesn’t incentivise entrepreneurs to solve. You can build a successful business by solving a Class 1 problem. Doing so by solving a Class 2 problem is more complicated: for individual people, everything works well; it’s the fact that everyone else uses it that creates the problem. Nobody wants to pay for that.
In other words, this is a type of market failure. Specifically, a market failure in which we have ‘too much’ of whatever is causing the Class 2 problem — a tragedy of the commons. We solved the Class 1 problems, everyone started using the technology without thinking about how it might affect everyone else, and now that the technology is mainstream, we have a Class 2 problem.
But notice where this situation comes from. Class 2 problems arise because a technology is appealing. This appeal encourages people to solve the Class 1 problems, encouraging everyone else to flock to it. In other words, the factors pushing web3 into the mainstream will be the same ones that create the most significant Class 2 problems.
Recalling the reasons I outlined last month, what makes web3 appealing comes down to three different things:
Ownership: people can create and own assets without relying on a middleman.
Programmability: assets can be exchanged and automated.
Trust: everyone can know the relations (like transactions) between those assets.
Web3 enables owning assets online, exchanging those assets, and proving that those exchanges happened.
How could this be a bad thing?
OWNERSHIP
You can provably own assets on the blockchain without relying on a monopolistic middleman.
These are not exhaustive lists, but two major issues of ‘everyone being able to own assets without relying on anyone else’ are what it means for existing elites in society and the new elites who replace them.
Undermining the State’s Monopoly on Money
Everyone has heard the schtick about how blockchain is meant to replace the Facebook’s and YouTube’s of the world, but there is another type of organisation we rely on to verify what we own: national governments, which provide the ultimate backstop for national currencies.
But as blockchains become mainstream, the cryptocurrencies which power them will progress from the £700 billion valuation they hold today to many trillions. Unlike traditional currencies, or other assets like real estate and company stocks, the government has no role to play. Governments mint traditional currencies and back up ownership of real estate and stocks in courts of law, but they have no role to play for the blockchain. There’s a reason that countries like Egypt, Turkey, and India have banned crypto. Contrary to actually banning it, China has simply brought blockchains firmly under the state’s control.
As money flows into crypto, governments will progressively lose control over the supply of money, and therefore interest rates. What does that mean for the power of governments to manage the economy? What does it mean for the ability of governments to bring in tax revenue?
I expect cryptocurrencies operated by central banks to play a big role in the future, but more is needed to answer these questions fully.
Entrenching New Elites
Whilst existing elites like governments will feel their power under threat, new elites will rise as web3 becomes mainstream. There is a small group of people who own sizable portions of cryptocurrency. As the value of crypto grows, so will their wealth, making many some of the wealthiest people in the world and creating a new entrenched elite.
How they use the influence that comes from that position remains to be seen.
PROGRAMMABILITY
Blockchain lets you exchange assets, and do so programmatically.
Blockchain makes it easier for individuals or groups to unilaterally make transactions, or create code that does the same thing. This empowers bad actors and good ones.
Empowering Bad Actors
Terrorists and other bad actors already have a range of ways to funnel money into their bank accounts, but crypto is another good one. Sanctioned organisations like the Iranian government and ISIS already use crypto to receive income because, for their purposes, it is more robust than existing payments infrastructure, such as Swift. But today, this is limited because crypto has little liquidity, making it harder to find people who will accept it as payment.
As web3 becomes mainstream, this will change: cryptocurrencies will become globally acceptable. This benefits everyone, including bad actors. Indeed, ISIS news sites already fund their operations with crypto donations. Few people are affected by this today, but web3 going mainstream makes this sort of illicit funding possible at significant scale. No matter how regulated web3 is, there will always be places on the internet where people who want to fund terrorist groups can use crypto to do so. The answer is to ask questions about stopping that before the source and mitigating it after delivery.
Empowering Bad Code
The critical thing about web3 is that you can write code (smart contracts) that perform actions without anyone being involved after the smart contract is published. Beyond people sending money to others using crypto, you can have people sending money to a smart contract, which could also be malicious. Part of what is propelling web3 mainstream is that anyone can launch any smart contract — but anyone includes bad actors. That’s the whole point of all every Class 2 problem: these problems happen when the good of something goes too far.
TRUST
Everyone can verify who owns what and who exchanged what.
Environmental Cost
2022 was a big year for blockchain because Ethereum improved its energy efficiency by 99.9% by moving to the more efficient proof-of-stake consensus mechanism. Blockchains spend a lot of energy ensuring that every computer on the network agrees on who owns what. By moving from proof-of-work to proof-of-stake, Ethereum now has a lower carbon cost per year than PayPal.
Great, for now. The problem is, Ethereum and other blockchains will likely increase in scope by 1,000x or more. Despite being much more energy efficient than before, that does not make blockchain energy efficient enough for the future. And whilst further changes are planned, like sharding, to make Ethereum more energy efficient, and whilst most other chains, albeit smaller, are also cleaner, it’s worth bearing in mind that Bitcoin reached trillions of pounds worth in value, despite having enormous energy usage: energy efficiency is usually not a priority.
Indeed, environmental costs are the classic tragedy of the commons. As blockchains spread across the world, their energy cost will become significant. Whether that becomes a major environmental cost depends more on how quickly the world transitions to renewable energy than how quickly blockchains can become more energy efficient.1
Privacy
Private blockchains will become common, but in the past, privacy has often been sacrificed for usability, just like the environment. As web3 becomes mainstream, there is good reason to expect these trends to persist. And whilst your name won’t be tied to the blockchain every time you buy something at Starbucks, one of your crypto wallets will be. When web3 is mainstream, and many more transactions are stored on the blockchain, there will be enough to build up an informative picture of an individual, despite associated privacy issues.
Society still has not developed new norms for privacy in the internet age, or has accepted that 20th century privacy ideals are impossible in the 21st. Questioning and updating those norms will only become more critical.
Kelly’s Class 1 / Class 2 concept is interesting and useful, but it mainly gives us a different lens to evaluate tragedy of the commons issues, rather than being a completely original concept. It is also a helpful prompt to think about how the features which make something useful can be the same reasons that make it problematic.
In applying the concept to web3, I’ve outlined a non-exhaustive selection of problems that could become increasingly problematic during the rest of the 2020s. These problems will begin as a sideshow, resulting from blockchain becoming increasingly valuable for society. And like there are significant problems with the internet, or any other new technology, we can embrace the overwhelming good and navigate the new issues at the same time.
It is crucial to rise to those problems: we will only face them because blockchain is good for the world, and for that reason, it is vital that we do.
Energy cost of blockchains will not lead to environmental cost if the world can transition to renewable energy sources in a short enough time frame. I would not be surprised if the world largely adopted renewable energy well before adopting blockchains.